IRJC

International Journal of Marketing, Financial Services & Management Research

Vol.1 Issue 9, September 2012, ISSN 2277 3622

MERGERS IN INDIAN BANKS: A STUDY ON MERGERS OF HDFC

BANK LTD AND CENTURION BANK OF PUNJAB LTD.

DEVARAJAPPA S.*

*Assistant Professor in Commerce,

University College of Arts,
Tumkur University.

ABSTRACT

The purpose of the present paper is to explore various motives of merger in Indian banking
industry. This includes various aspects of bank mergers. It also compares pre and post merger
financial performance of merged banks with the helps of financial parameters like, Gross Profit
margin, Net Profit margin, operating Profit margin, Return on Capital Employed, Return on
Equity, and Debt Equity Ratio. Through literature Review it comes know that most of the work
done high lightened the impact of merger and Acquisition on different companies. The data of
Merger and Accusations since economic liberalization are collected for a set of various financial
parameters. Independent T-test used for testing the statistical significance and this test is applied
not only for ratio analysis but also effect of merger on the performance of banks. This
performance being tested on the basis of two grounds i.e. , Pre-merger and Post- merger. Finally
the study indicates that the banks have been positively affected by the event of merger.

KEYWORDS: Mergers & Acquisition, Banking, Financial Parameters, Profitability, Indian

Banks.
______________________________________________________________________________

INTRODUCTION

Bank in general terminology is referred to as an financial institute or a corporation which is

authorized by the state or central government to deal with money by accepting deposits, giving
out loan and investing in securities. The main roles of Banks are Economics growth, Expansion
of the economy and provide funds for investment. In the resent times banking sector has been
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undergoing a lot of changes in terms of regulation and effects of globalization. These changes
have affected this sector both structurally and strategically. With the changing Environment
many different strategies have been adopted by this sector to remain efficient and to surge ahead
in the global arena. One such strategy is through the process of consolidation of banks emerged
as one of the most profitable strategy. There are several ways to consolidate the banking
industry; the most commonly adopted by banks is merger.

Merger of two weaker banks or merger of one health Bank with one weak bank can be treated as
the faster and less costly way to improve profitability then spurring internal growth (Franz, H.
Khan 2007).The main motive behind the merger and acquisition in the banking industry is to
achieve economies of scale and scope. Mergers also help in the diversification of the products,
which help to reduce the risk.
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International Journal of Marketing, Financial Services & Management Research
Vol.1 Issue 9, September 2012, ISSN 2277 3622

The Indian banking sector can be divided into two eras, the liberalization era and the post
liberalization era. In the pre liberalization era government of India nationalized 14 banks as
19July 1965 and later on 6 more commercial Banks were nationalized as 15 April 1980. In the
year 1993 government merged the new banks of India and Punjab National banks and this was
the only merged between nationalized Banks after that the number of Nationalized Banks
reduces from 20 to 19.In the post liberalization regime, government had initiated the policy of
liberalization and licenses were issued to the private banks which lead to the growth of Indian
banking sector. The Indian banking industry shows a sign of improvement in performance and
efficiently after the global crises in 2008-2009. In the Indian banking industry having far better
position than it was at the time of crises. Government has taken various initiatives to strengthen
the financial system. The economic recovery gained strength on the bank of a variety of
monetary policy initiatives taken by the RBI

THE INDIAN BANKING SYSTEM

At the top of the Indian banking system is the central bank of India known as Reserve Bank of
India .the Reserve bank of India is responsible for the Indian banking system since 1935, the
commercial banks in India are segregated into Public sector banks ,Private sector banks and
Foreign banks .All these banks fall under Reserve Bank of India classification of scheduled
commercial banks (SCBs).Public sector, Private sectors and Foreign banks as they are include in
the second scheduled of the reserve bank of India Act 1934. The Public sector was wholly owned
by the government of India before the reforms. The PSBs are the biggest player in the Indian
banking system and they account for 70% of the assets of scheduled commercial banks in India

MERGER OF BANKS IN INDIA

Merger can be defined as a mean of unification of two players into single entity. Merger is a
process of combining two business entities under common ownership.

According to Oxford Dictionary the expression “merger means combing two commercial
companies into one”

Bank merger is an event of when previously distinct banks are consolidated into one institution
(Pilloff and Santomerro, 1999).

A merger occurs when an independent bank loses its charter and becomes a part of an existing www.indianresearchjournals.com
bank with one headquarter and unified branch network (Dario Farcarelli 2002)

Merger occurs by adding the active(bidder) bank assets and Liabilities to the
target(Passive)banks balance sheet and acquiring the bidder‟s bank name through a series of
legal and Administrative measures.
Merger and Acquisition in Indian banking sectors have been initiated through the
recommendations of Narasimham committee II. The committee recommended that “merger
between strong bank / financial institutions would make for greater economic and commercial
sense and would be case where the whole is greater than the sum of its parts
and have “force multiplier effect”
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International Journal of Marketing, Financial Services & Management Research
Vol.1 Issue 9, September 2012, ISSN 2277 3622

REVIEW OF RELATED LITERATURE

Several studies have been conducted to examine the impact of mergers and Acquisition. Berger
and Humphery (1997) in their study provide on extensive review on the efficiency of baking
sector. They pointed out that majority of studies focused on the banking markets of well
developed countries with particular emphasis on US market.

Anand Manoj & Singh Jagandeep (2008) studied the impact of merger announcements of five
banks in the Indian Banking Sector on the share holder bank. These mergers were the Times
Bank merged with the HDFC Bank, the Bank of Madurai with the ICICI Bank, the ICICI Ltd
with the ICICI Bank, the Global Trust Bank merged with the Oriental Bank of commerce and the
Bank of Punjab merged with the centurion Bank. The announcement of merger of Bank had
positive and significant impact on share holder‟s wealth. The effect on both the acquiring and the
target banks, the result showed that the agreement with the European and the US Banks Merger
and Acquisitions except for the facts the value of share holder of bidder Banks have been
destroyed in the US context, the market value of weighted Capital Adequacy Ratio of the
combined Bank portfolio as a result of merger announcement is 4.29% in a three day period (-1,
1) window and 9.71 % in a Eleven days period (-5, 5) event window. The event study is used for
proving the positive impact of merger on the bidder Banks.

Lehto Eero & Bockerman Petri(2008) evaluated the employment effects of Merger and
Acquisitions on target by using match establishment level data from Finland over the period of
1989-2003. They focused cross border Merger and Acquisitions as well as domestic Merger and
Acquisitions and analyzed the effect of employment of several different types of Merger and
Acquisitions. They evaluated that the cross border Merger and Acquisitions lead to downsizing
the manufacturing employment and the effects of cross border Merger and Acquisitions on
employment in non- manufacturing are much weaker and change in ownership associated with
domestic Merger and Acquisitions and internally restructuring also typically causes employment
losses. To look the effects of cross border Merger and Acquisitions (M&As) Hijzen Alexander et
al., (2008) studied the impact of cross border Merger and Acquisitions (M&As) and analyzed the
role of trade cost, and explained the increased in the number of cross border Merger and
Acquisitions (M&As) and used industry data of 23 countries over a period of 1990 -2001. The
result suggested that aggregate trade cost affects cross border merger activity negatively, its

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impact differ importantly across horizontal and non-horizontal mergers. They also indicated that
the less negative effects on horizontal merger, which is consistent with the tariff jumping
agreement, put forward in literature on the determinant of horizontal FDI.

Mantravadi Pramod & Reddy A Vidyadhar (2007) evaluated that the impact of merger on the
operating performance of acquiring firms in different industries by using pre and post financial
ratio to examine the effect of merger on firms. They selected all mergers involved in public
limited and traded companies in India between 1991 and 2003, result suggested that there were
little variation in terms of impact as operating performance after mergers. In different industries
in India particularly banking and finance industry had a slightly positive impact of profitability
on pharmaceutical, textiles and electrical equipments sector and showed the marginal negative
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International Journal of Marketing, Financial Services & Management Research
Vol.1 Issue 9, September 2012, ISSN 2277 3622

impact on operative performance. Some of the industries had a significant decline both in terms
of profitability and return on investment and assets after merger.

Coming down on the various motives for Merger and Acquisitions, Mehta Jay & Kakani Ram
Kumar (2006) stated that there were multiple reasons for Merger and Acquisitions in the Indian
Banking Sector and still contains to capture the interest of a research and it simply because of
after the strict control regulations had led to a wave of merger and Acquisitions in the Banking
industry and states many reason for merger in the Indian Banking sector. While a fragmented
Indian banking structure may be very well beneficial to the customer because of competition in
banks, but at the same time not to the level of global Banking Industry, and concluded that
merger and Acquisition is an imperative for the state to create few large Banks.

Müslümov Alövsat (2002) examined that synergy is one of the main factor behind the merger
and took 56 mergers from US industry, and the cash flows improvement in the productive usage
of assets and increasing the sales and showed the surviving firm improvement in operating cash
flows. The post merger create additional value and shows the improvement of bidder firm with
price to book ratio, used non-parametric test as most suitable method of testing post merger
performance.

R. Srivassan et al., (2009) gave the views on financial implications and problem occurring in
Merger and Acquisitions (M&As) highlighted the cases for consolidation and discussed the
synergy based merger which emphasized that merger is for making large size of the firm but no
guarantee to maximize profitability on a sustained business and there is always the risk of
improving performance after merger.

Sinha Pankaj & Gupta Sushant (2011) studied a pre and post analysis of firms and concluded that
it had positive effect as their profitability, in most of the cases deteriorated liquidity. After the
period of few years of Merger and Acquisitions(M&As) it came to the point that companies may
have been able to leverage the synergies arising out of the merger and Acquisition that have not
been able to manage their liquidity. Study showed the comparison of pre and post analysis of the
firms. It also indicated the positive effects on the basis of some financial parameter like Earnings
before Interest and Tax (EBIT), Return on share holder funds, Profit margin, Interest Coverage,
Current Ratio and Cost Efficiency etc.

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Aharon David Y et al., (2010), analyzed the stock market bubble effect on Merger and
Acquisitions and followed by the reduction of pre bubble and subsequent, the bursting of bubble
seems to have led to further consciousness by the investors and provide evidence which suggests
that during the euphoric bubble period investor take more risk. Merger of banks through
consolidation is the significant force of change took place in the Indian Banking sector.

Kuriakose Sony et al., (2009), focused on the valuation practices and adequacy of swap ratio
fixed in voluntary amalgamation in the Indian Banking Sector and used swap ratio for valuation
of banks, but in most of the cases the final swap ratio is not justified to their financials.
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International Journal of Marketing, Financial Services & Management Research
Vol.1 Issue 9, September 2012, ISSN 2277 3622

NEED FOR THE STUDY

It is seen that, most of the works have been done on trends, policies & their framework, human
aspect which is needed to be investigated, whereas profitability and financial analysis of the
mergers have not give due importance. The present study would go to investigate the detail of
Merger and Acquisitions (M&As) with greater focus on the Indian banking sector. The study
will also discuss the pre and the post merger performance of banks. An attempt is made to
predict the future of the ongoing Merger and Acquisitions (M&As) on the basis of financial
performance of Indian banking sector.

RESEARCH METHODOLOGY

A. DATA COLLECTION

For the purpose of evaluation of investigation data is collected from merger and
Acquisition (M$As) of Indian Banking Industry. The financial and accounting data of
banks is collected from banks annual reports to examine the impact of merger on
financial performance of the banks.

B. METHODOLOGY

To test the prediction, methodology of comparing the pre and post performance of the
banks after the merger has been adopted by using following financial parameters such as
Gross Profit margin, Net Profit margin, Return on Capital Employed, Return on Equity
and Debt Equity Ratio. Research has taken one case of merger as Sample i.e., merger of
HDFC Bank ltd & Centurion Bank of Punjab. The pre merger (three years prior ) and
post merger (after three years) of the financial ratios being compared. The year of merger
is considered as base year and denoted as 0 and it is excluded from the evaluation.
Keeping in view the purpose and objective of the study independent T-test being
employed under this study.

C. RATIOS

Gross Profit Margin Ratio : Gross Profit / Sales X 100

Net Profit Margin Ratio : Net Profit / Sales X 100 www.indianresearchjournals.com

Operating Profit Margin Ratio : Operating Profit / Sales X 100

Return on Capital Employed : Net Profit / Total Assets X 100

Return on Equity : Net Profit / Equity Capital X 100

Debt Equity Ratio : Total Debt / Total Equity X 100

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International Journal of Marketing, Financial Services & Management Research
Vol.1 Issue 9, September 2012, ISSN 2277 3622

ANALYSIS AND INTERPRETATION

In this study deals with merger of HDFC Bank Ltd (bidder bank) and Centurion Bank of Punjab
Ltd (Target Bank) . This deals took place in year 2008(i.e. may 23rd 2008). In order to analyses
the financial performance of banks after the merger, the financial and accounting ratios like
Gross Profit Margin, Operating Profit Margin, Return on Capital Employed, Return on Equity
and Debt Equity Ratio have been calculated. Table 3 indicates that the financial performance of
both the banks before the merger. Table 4 shows the financial performance of HDFC Bank ltd
(bidder bank) after merger.

TABLE-3
FINANCIAL PERFORMANCE OF HDFC BANK LTD AND CENTURION BANK OF
PUNJAB FOR THE LAST THREE FINANCIAL YEARS IS ENDING BEFORE THE
MERGER
FINANCIAL RATIOS (IN PERCENTAGE)

Ratios HDFC Bank Ltd (Bidder Bank) Centurion Bank of Punjab(Target Bank)

As on As on As on As on As on As on
31-03-2005 31-03-2006 31-03-2007 31-03-2005 31-03-2006 31-03-2007
Gross 74.1719 71.1233 69.9408 55.8583 53.4151 69.5703
Profit
Margin

Net Profit 21.5119 19.4573 16.5691 8.7116 15.2490 9.5683

Margin

Operating 53.1167 46.0083 47.9309 37.2331 22.4315 37.6088

Profit
Margin

Return on 1.2941 1.18463 1.2511 0.6538 1.0810 0.6567

Capital
Employed
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Return on 214.7799 278.0801 357.3844 29.7572 86.9701 77.4651
Equity

Debt 134.3883 192.7486 222.6536 35.2757 67.1107 100.8016

Equity
Ratio

Source: financial statements of Banks

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International Journal of Marketing, Financial Services & Management Research
Vol.1 Issue 9, September 2012, ISSN 2277 3622

TABLE-4

FINANCIAL PERFORMANCE OF HDFC BANK LTD FOR THE NEXT THREE

FINANCIAL YEAR WAS ENDING AFTER THE MERGER ANNOUNCEMENT

FINANCIAL RATIOS (IN PERCENTAGE)

Ratios HDFC Bank Ltd (Bidder Bank)

As on As on As on
31-03-2009 31-03-2010 31-03-2011
Gross Profit Margin 74.76217 74.66454 76.2925
Net Profit Margin 13.74548 18.23227 19.70267
Operating Profit 54.61426 51.12141 54.53866
Margin
Return on Capital 1.22493 1.3255 1.41566
Employed
Return on Equity 527.75165 644.18447 843.96749
Debt Equity Ratio 342.04104 393.9357 479.29082
Source: financial statements of Banks

http://www.moneycontrol.com/stocmarketsindia/

TABLE-5

MEAN AND STANDARD DEVIATION OF PRE-MERGER AND POST-MERGER

RATIOS OF COMBINED (CBOP & HDFC BANKS) AND ACQUIRING BANK (HDFC
BANK)

Mean Std. t-value Sig.

Deviation
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Gross Profit Margin Pre 70.2136 1.9711 -4.008 0.016
Post 75.2397 0.9130
Net Profit Margin Pre 18.8413 3.3731 0.610 0.575
Post 17.2268 3.1033
Operating Profit Pre 46.7550 4.5640 -2.319 0.081
Margin Post 53.4248 1.9951
Return on Capital Pre 1.1877 0.0475 -2.182 0.095
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International Journal of Marketing, Financial Services & Management Research
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Employed Post 1.3220 0.0954

Return on Equity Pre 2.1775 48.0414 -4.711 0.009
Post 6.7197 159.9283
Debt Equity Ratio Pre 1.4876 36.5495 -5.667 0.005
Post 4.0509 69.3013
Source: based on tables 3&4, 5% level of significance.

In the present case, the merger of the Centurion Bank of Punjab and the HDFC Bank, the
comparison between pre and post performance we seen that the Mean value of Gross Profit
margin(70.2136% Vs 75.2397%) has increased with t-value -4.008 which shows significant
improvement in the Gross Profit margin after the merger but in Net Profit margin and Operating
Profit margin you can see the decline the in the Mean of both parameters that indicates that there
is no change in the performance of banks Net Profit margin and Operating Profit margin after
merger and results shows that there is no significance with Mean (18.8413% Vs 17.2268%) and
t-value 0.610 and (46.7550% Vs 53.4248%) and t-value -2.319 and the mean Return on Capital
Employed(1.1877% Vs 1.3220%) and t-value -2.182 which also not Significant statically and
shows that no charge has been in term of investment after the merger. the mean of return on
equity and debt equity ratio shows improvement and statically conformed significant to mean
value (2.1775%vs6.7197%)and t value -4.711and (1.4876%vs4.0509%) and t value -5.667.the
mean value of equity in post merger has been n increased so it increased the share holders return
held it also shows the improved performance of bank after merger. Similarly debt equity ratio
also improved after the merger, the mean value shows the change in debt equity ratio after the
merger. From the above analyses we can conclude that some ratios indicates no effect but most
of the ratios shows the positive effect and increased the performance of banks after merger
announcement.

CONCLUSION

Merger is the useful tool for growth and expansion in Indian Banking Sector. It is helpful for
survival of weak banks by merging into larger bank. This study shows that impact of merger on
financial performance of Indian Banking sector. For this a comparison between pre and post

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merger performance examined in terms of Gross Profit margin, Net Profit margin, Operating
Profit margin, Return on Capital employed, Return on Equity and Debt equity ratio. In the
present case study , the return on equity , debt –equity ratio and Gross Profit margin has shows
the improvement after the merger and for the purpose and objective of the study, investigator
apply t-test for analyzing the pre and post merger performance of banks and result suggested
that after the merger the financial performance of the banks have increased. The most important
is that to generate net higher profit after the merger in order to justify the decision of merger
undertaken by the management to the shareholders.
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International Journal of Marketing, Financial Services & Management Research
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n. Lubatkin, M (1983): „Mergers and Performance of the Acquiring Firm‟, Academy of

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